Aguilera Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant as follows. Production of the implants will require $4,617,000 in net working capital to start and cumulative net working capital investments each year will equal 15% of the projected sales for the following year. Total fixed costs are $1,500,000 per year, variable production costs are $265 per unit, and the units are priced at $380 each. The equipment needed to begin production has an installed cost of $21,000,000. Because the implants are intended for professional singers, this equipment is considered industrial machinery and thus qualifies as seven-year MACRS property (14.29%, 24.49%, 17.49%, 12.49%, 8.93%, 8.93%, 8.93%, 4.45%). In five years, this equipment can be sold for about 20% of its acquisition cost. AAI is in the 35% marginal tax bracket and has a required return of 18%. Based on these preliminary project estimates, what are the NPV and IRR of the project?
Year 1: 81000 (unit sales)
Year 2: 94000 (unit sales)
Year 3: 108000 (unit sales)
Year 4: 103000 (unit sales)
Year 5: 84000 (Unit sales)
Answer options:
a) NPV $405,300.50; IRR 19.56%
b) NPV $405,300.50; IRR 17.39%
c) NPV $400,327.70; IRR 18.59%
d) NPV $400,327.70; IRR 19.56%